General Solicitation: The Elephant in the Demo Day Room
Shriram Bhashyam | September 26, 2013
Yesterday, the Entrepreneurs Roundtable Accelerator
had its coming-out party for its latest batch. With a wink and a nod, the ERA demo day, one of the first since the new SEC rules
allowing general solicitation went into effect on September 23, side-stepped the general solicitation issue. As general solicitation is indeed still very new, it will be interesting to see where the dust settles on how accelerators and incubators deal with the issue.
General solicitation is one of the murkier waters in the sea of securities laws. How murky? For starters, the SEC's Regulation D does not define general solicitation
. In fact, in the release adopting the final rule lifting the ban on general solicitation, the SEC admitted as much (see pages 6-7 of this dense document
, or just take our word for it). That leaves the startup world with the following sources of guidance on general solicitation:
- SEC rules;
- SEC interpretations;
- SEC enforcement actions;
- SEC "no action" letters; and
- case law.
Long story short: these sources do not squarely address whether a demo day is a general solicitation. Demo day pitches and presentations typically have included explicit declarations from companies about how much they are raising. These fundraises are typically done pursuant to the SEC's Regulation D, which now permits general solicitations for offerings. However, there are separate requirements around Reg. D offerings using general solicitation. So it would benefit companies raising money coming out of demo day to know whether or not they are generally soliciting investors for their fundraise.
The ERA demo day took some measures that acknowledged the elephant in the room. Apparently, none
of the presenting companies concluded their presentation with an explicit note of their fundraising intentions. In fact, an MD of the ERA program noted
"None of the companies here are fundraising.... This is not a general solicitation."
We're interested to see how the Blueprint Health
demo day (which is today, September 26) handles the issue. If you attend, drop us a line in the comments section below.
In addition to monitoring evolving demo day practices, the SEC may have something to say as well, which will no doubt influence market practices around demo day. Proposed amendments
to Rule 506 of Reg. D have generated considerable controversy in the startup world. Comment letters
have asked the SEC to clarify general solicitation, including addressing demo days specifically (ideally creating some kind of explicit safe harbor around demo day practices).
As the regulatory landscape around fundraising continues to shift, it behooves founders and investors alike to monitor these changes and see where market practices settle out.
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